Knowing China through Taiwan

Economy

Beijing alert to national debt risk fears

Three years after a massive stimulus package kept China's economy moving during the global recession, policymakers and the market are now awakening to risks facing the world's second-largest economy.

With mounting local debt triggering widespread concerns among domestic investors and foreign rating agencies, the government has listed reducing its financial risks as an important task this year.

In an executive meeting held this week, the State Council, or China's cabinet, called for more effective efforts to guard against risks in local government debt and credit markets while vowing to step up market oversight.

The China Banking Regulatory Commission also sounded an alarm for commercial lenders, warning that they should be careful of loans extended to local government financing vehicles, which are financial entities set up by local governments to invest in infrastructure and other projects.

US rating firms Moody's and Fitch both lowered their credit ratings for China last week over concerns about the risks that rapidly surging local government borrowing has posed to the broader economy.

"Progress has been less than anticipated in making local government contingent liabilities more transparent and reining in rapid credit growth," Moody's said.

Authorities have tried to slow local government borrowing through the financing vehicles after reports showed that about 35% of debt owed by local governments is set to mature between 2012 and 2014, raising concerns that they may be unable to handle the payments amid a slowing economy.